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Hewlett-Packard Co
5/6/2010 
 
Hewlett-Packard Company (HP) is a global provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses (SMBs) and large enterprises, including customers in the government, health and education sectors. The Company’s offerings span multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services, and consulting and integration services; enterprise information technology infrastructure, including enterprise storage and server technology, networking products and resources, and software that optimizes business technology investments; personal computing and other access devices, and imaging and printing-related products and services. In April 2010, the Company completed its acquisition of 3Com Corporation.
 
Last Price 50.93
52 Week High 54.75
52 Week Low 33.40
Volume 600
Average Daily Volume

Does Hewlett-Packard make for an intelligent investment or intelligent speculation today?

Starting with a base estimate of annual Free Cash Flow at a value of approximately $10,000,000,000 and the number of shares outstanding at 2,365,000,000 shares; we used an assumed FCF annual growth of 10 percent for the first 10 years and assume zero growth from years 11 to 15.  Review the Free Cash Flow record here:

http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=USA&Symbol=HPQ

The resulting estimated intrinsic value per share (discounted back to the present) is approximately $80.61.

  Market Price = $50.93
  Intrinsic Value = $80.61  (estimated)
  Debt/Equity ratio = .38
  Price To Value (P/V) ratio = .63  and the estimated bargain = 37. percent.

Before we make a purchase, we must decide ( filter #1 ) if HPQ is a high quality business with good economics. Does HPQ have ( filter #2 ) enduring competitive advantages, and does HPQ have ( filter #3 ) honest and able management.

The current price/earnings ratio = 15.4
It 's current return on capital = 11.91
Using a debt to equity ratio of .38, Hewlett-Packard shows a 5-year average return on equity = 16.6

Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.

Growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.

Does Hewlett-Packard make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?

Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misapraised. In terms of Opportunity Cost, is HPQ the best place to invest our money today?

TIME FORWARD PROJECTION:

How will Hewlett-Packard compete going forward? Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.

In summary, using a debt to equity ratio of .38, Hewlett-Packard shows a 5-year average return on equity = 16.6 . Based on a holding and compounding period of 10 years, and a purchase price bargain of 37. percent, and a relative FCF growth of 10 percent, then the estimated effective annual yield on this investment may be greater than 14.7 %.

Going forward, are there any tranformational catalysts or condition indicators imaginable on the horizon?

As always, I appreciate hearing your views,

Bud Labitan
Author of the new book 'Price To Value'
http://www.amazon.com/Price-Value-Bud-Labitan/dp/0557317185

Author of 'The Four Filters Invention of Warren Buffett and Charlie Munger'
http://www.amazon.com/dp/0615241298

Labitan Partners
budlabitan@ aol.com
www.frips.com